Project Management Training - What is Risk Management?

Project Management Training for the PMP® Certification. What is Risk Management?

It is evident that every living creature encounters risks. A risk is an uncertainty in the future. Risk is all about future uncertainties. It is not about the past or about the present. These uncertainties can be around a life, a project and a process. These future uncertainties could be described as “doubt,” “indecision,” “hesitation,” “vagueness,” “ambiguity,” “insecurity,” or “improbability.”

Let’s explore the uncertainty in a project. When you begin a project, you have doubt whether the project will be successful or not and/or whether a stakeholder will make a decision or not. Similarly you contemplate whether stakeholders will hesitate in providing all the requirements or even forget some of them. Will the requirements be vague or will you be working with a few ambiguities. All these future uncertainties provide insecurity in a project and the probability of success becomes low as you start the project.

As a project manager you will be required to continuously identify any uncertainties (risks) throughout the project lifecycle. You will need to validate all data about any identified risk. You will also be required to perform rigorous analysis so that you can ascertain what risks are higher threats and what risks can be put on a watch list (risks that are not major). Therefore to determine what risks you must watch now and what risks you may accept, you will need to create a mechanism of scoring the risks.
The risks are each analyzed based on some criteria of occurrence (probability), damage due to the risk and its monetary effect on the project. Risk analysis is performed in two distinct processes. The first process is about qualifying the risks; that is, authenticating that each of the identified risks are valid and that each can be assigned a score and impact. The second process takes the qualified risk and calculates the expected monetary value (effect in dollars) of the risk. In this process the risk probability (this is always in percent) is multiplied by the dollar effect.

After analysis is finished a strategy is determined for each risk; that is, how will you handle the risk. These strategies could be mitigation, transference and or avoidance. When we use a mitigation strategy, the probability or the impact / effect is reduced so as to reach a point for acceptance of that risk, if it occurs. The strategy of transferring a risk, as the name implies, means you transfer the risk to a third party; it is referred to as buying insurance against the risk. The avoidance strategy is about altering the project plan so as to avoid the occurrence of the risk.